Why Good Traders are Really Good Losers

Why Good Traders are Really Good Losers

Posted On March 17, 2021 2:40 pm

A previous colleague of mine used to arrive at the office I worked at every morning and state the following for all to hear: “The market has no day-to-day memory.”  It was his way of issuing us a dual reminder that short-term stock prices can do anything; having total disregard for what you think they should do with no bearing on value or fundamentals.  

More importantly, he was also implying that we traders shouldn’t have a daily memory.  In other words, yesterday’s trades are in the past, and we should always be looking forward and assessing new information.  If something changes, be it news or the chart’s technical set-up, you must be able to adjust accordingly.  This is why I like to define my trade parameters — both the profit-taking target and the loss management level. 

For example, yesterday I sent an Options360 Service member alert to establish a bullish position in digital payment company, Stone Capital (STNE), in which I had a $78 per share upside target.  However, this exclusive alert — which I’m giving you a special peek into — also defined our risk and exit strategy:  

“Since we were using a vertical spread and the options were relatively thin hedges and adjustments, especially in a fast-moving market, might be difficult. Instead, we applied a stop loss level instructing Options360 members, “the risk management is simply if shares drop below $69.80 we exit the position” referencing this important support level on the chart. 

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stne nasdaq chart today

Unfortunately, this came to pass too quickly as shares gapped lower on the opening.  This morning, I quickly issued a follow-up alert reminding members that our ‘stop-loss’ had been hit, triggering an exit.  The position was closed for a very manageable loss.  

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To be a good trader, you have to also be a really good loser.  

The point is, being able to remain unemotional and adhering to your plan makes trading a lot easier. There’s no second-guessing (ok, maybe a little).  However, assuming you’ve established favorable risk/reward parameters by following your pre-defined game plan, profits should accrue over time. 

The STNE trade is now yesterday’s news.  It’s a trade that wasn’t successful. But, it won’t hurt my long-term performance goals, as long as I keep targeting (and securing) 45%-65% winners. 

Sure, they’ll be losers to accept and then move on from.  Then, it’s best to focus on finding the next winner.  This process has helped me and Options360 Service members outpace the S&P 500 average each of the past five years— averaging  67% annually. And we’re doing it yet again in 2021, as we’re already up 19.2% in 2021!

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.